Ottawa CRE investments 2022: The "Big M" year

Frank Mahovlich – “The Big M”
played in NHL 1957-1978
6 Stanley Cups
Hockey Hall of Fame inductee 1981
Appointed to Senate of Canada 1998

Ottawa  is likely similar to most other markets in 2022 in that investment sales sentiments seemed to carry over from 2021 with much activity in H1, while the impact of rising interest rates stemmed deal volume in H2.

The numbers are:

Please note there are sales of other assets classes that we have ignored in this summary. These include land sales to and between levels of government as well as alternative asset classes like hotels, student housing and retirement homes. We did include medical office sales.

This is a record year for Ottawa in terms of deal volume and number of transactions. As is usually the case, there is some explaining to do. The following is a discussion of the transactions that jumped out as being notable.

Something notable for us is that 2002 was an “M” year. Most notable is three companies that start with M. As well, there is the another big M at play.

The first M is Groupe Mach buying most of the Cominar office portfolio in Ottawa. That was 12 buildings worth $178 million in March. It went on to buy 77 Metcalfe for $19.1 million in July. And it finished 2022 by acquiring 222 Queen and 500 de la Cite (technically an asset in Gatineau) in October. That adds 15 buildings to its existing portfolio of 2 office buildings in Ottawa, with both of those purchased in 2021.

That is a major change to the office market ecosystem of owners and operators, and a seismic move considering the pervasive uncertainty about office market fundaments. Their investment thesis seemed to be invade Ottawa and acquire as much property as possible, much to the relief of all those tasked with selling office buildings here in the past 24 months. There is liquidity at least one buyer deep.

Groupe Mach gears up in Ottawa:

As a result, they now own:

  • 3 buildings in the CBD/Centretown submarket of 543,000 square feet;
  • 2 buildings that are fixer-uppers in the CBD of 343,000 square feet (and maybe nice net zero retrofits for Government of Canada occupancy eventually);
  • A 4-building suburban campus in Kanata of 333,000 square feet;
  • A 3-building suburban campus close to National Defence headquarters of 226,000 square feet
  • 3 buildings along the south corridor in Ottawa of 274,000 square feet and a building in the Gatineau market leased to PSPC of 344,000 square feet

The second M is Minto. Minto is an Ottawa-based firm with a long history as a home builder. It bought two parcels of land in 2022, one for $245 million and one for $40 million. For perspective, this is the only land sale for more than $50 million since 2016.There were few land sales of $20 to $50 million before 2020. In 2021 and 2022, there were 6 and 9 sales respectively in this price range. This is monster (small m) land activity here.

The last M is Morguard. It bought half of 215 Slater in the CBD and the Kinaxis design/build in Kanata. These two buildings represent another 260,000 square feet and $92.6 million in office sales. The Groupe Mach and Morguard investments were a large part of surprisingly strong interest in office buildings. Despite the headwinds of work from home exacerbated by the reluctance of civil servants to ever return to the office, there was tremendous activity in this asset class.

Major transactions in 2022 include:

  • Crestpoint buying 90% +/- of the new Amazon facility in Barrhaven for $484 million,
  • Woodburne/Epic buying the Skyline small-bay industrial portfolio for $154.5 million,
  • Centurion Apartment REIT buying Terrace Francesca, the LePine apartment building at 1425 Vanier Parkway for $207 million and $750,000 per door for 276 doors.
  • Groupe Mach continuing to add to its office portfolio here both with the Cominar REIT purchase, buying 222 Queen and 550 de la Cite for more former Cominar assets, and buying 77 Metcalfe.

This year saw more activity from a market looking to address a long-standing need for new logistics space, and the effect of functional obsolescence driving tenant demand. This was a big year of land sales for industrial uses:

  • Land for industrial development saw sales for $215.7 million
  • Rosefellow comes in Ottawa buying three parcels for $56.2 million
  • Canfirst gets back into the Ottawa market buying two parcels for $53.4 million
  • AIMco returns to the Ottawa market buying an industrial parcel for $26.6 million.

The big M is of course Macklen, Tiff Macklen, the Governor of the Bank of Canada and designated inflation crusher. Mr. Macklen is ahead of his central bank peers in raising interest rates to contain inflation before it becomes endemic at elevated levels.

Lastly, Howard Marks of Oaktree Capital Management has identified a sea change in his most recent memo. He has been at this for 50 years and this is the third sea change he has identified. That makes them rarities and worthy of note. His contention is:

“What are the factors that gave rise to investors’ success over the last 40 years?  We saw major contributions from:

  • the economic growth and pre-eminence of the U.S.;
  • the incredible performance of our greatest companies
  • gains in technology, productivity and management techniques; and
  • the benefits of globalization.  

However, I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all.”
(please note that the words in bold are those in his memo).

I suspect the same is true for the commercial real estate investment market. What do you think?